Sterlite’s revised offer for US-based mining firm Asarco’s (not listed) copper assets, ring fenced from all other liabilities, has been accepted by the lenders and is now placed before the bankruptcy court for approval.
The deal is expected to be complete in the next 6 months. Competitive bids are still possible, and Sterlite has the option to match any bids, but has no obligation to do so.
The new offer includes an upfront payment of $1.1 billion and deferred payments of $600 million over the next 9 years (non interest paying and non recourse, $20 million each year and $460 million bullet payment in the 9th year).
This represents an effective cost of $1.4 billion against the street’s expectation of $1.5-2 billion. This is a substantial improvement over the previous bid of $2.6 billion and is better structured with a lower initial cash outflow.
Based on our copper price forecasts, the deal has a NPV of $350 million and would add Rs23 to our target price. It is marginally EPS decretive in FY10, but would add around Rs5, or 10%, to our FY11 EPS estimate.
Asarco operated at a cash cost of $1.45/lbs of copper in the December quarter and in January at $1.37/lbs against the current copper price of $1.6c/lbs.
Also, it has 5m tonnes of copper reserves, which, on the current production of 200kt, represent 25 years of mine life. Smelter capacity is even higher at 270ktpa.
Management expects to increase production by 25% and reduce costs further to US$1.25/lbs, to bring Asarco to the second quartile of the cost curve.
On its standalone balance sheet, Sterlite has $2 billion of cash and doesn’t need to raise debt for this acquisition.
It has already provided for equity contributions of $500 million each for its energy business and the Vedanta alumina ventures and is still left with $1 billion for reducing minorities in Hindustan Zinc and Balco (estimated cost $1.5 billion).
Sterlite remains our top pick among metal stocks in India because of its strong cash rich balance sheet, low-cost profile, increasing market share and rising diversification of earnings.
The stock is trading at 0.7x P/BV, 1.6x EV/EBITDA and 5.1x PER on FY09E. Our 12-month price target is Rs540 based on a Sum of Parts methodology.